Shocks and shifts: thoughts on geo-economics
Response to Jeffrey Frankel at the IISS seminar on geo-economics, Bahrain, 24-5 March 2012

Part of what makes “geo-economics” an interesting concept is that it connects the thinking of economists, who tend to think about the international system in win-win terms, and international relations theorists, who tend to think in zero-sum terms. In particular, Edward Luttwak writes of the use of the methods of commerce (as opposed to military methods) within a “logic of conflict, which is adversarial, zero-sum, and paradoxical”. With this “hard” version of “geo-economics” in mind, it may be interesting to ask what effects the possible shocks that Jeffrey Frankel outlines could have on “strategic change” – that is, the global distribution of power. In particular, could risks for the world economy could also be opportunities for some geo-economic powers within it?

Specifically, what would be the consequences of possible shocks for China and Germany – the two countries that Sanjaya Baru, in his paper, calls “the geo-economic powers of our time”? China and Germany seem to have both benefited from the crisis: the financial crisis seems to have amplified Chinese power and the euro crisis seems to have amplified German power. Of course, there are big differences between them in terms of political system, their stages of economic development, and demographic profiles. But, as Robert Skidelsky points out in his paper, how individual states act is determined by the system of inter-state relations as well as by their domestic characteristics.

In fact, despite the differences between them, China and Germany share characteristics and seem during the last few years to have played somewhat analogous roles in the international economic system. There seems to have been what one might call a post-crisis alignment between China and Germany.  Martin Wolf has even written in the Financial Times of “Chermany” – that is, “a composite of the world’s biggest net exporters”. China and Germany, Wolf points out, are “the largest exporters of manufactures, with China now ahead of Germany; they have massive surpluses of saving over investment; and they have huge trade surpluses.”

Based on this structural similarity, Wolf argues, China and Germany follow a similar economic policy:

Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit. If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.

As a result of this approach, China and Germany have often found themselves on the same side – and the opposite side to the United States – in debates on the global economy in the last two years. Some Chinese analysts see parallels between emerging German leadership at a regional level and emerging Chinese leadership at a global level: the crisis has increased expectations of both countries with which they are uncomfortable.

The first two possible shocks outlined by Frankel – a worsening of the euro crisis and what he calls US “fiscal self-destruction” – are particularly interesting in this context because in a sense they are both in different ways an extension of crisis that began in 2008 from which China and Germany seem to have benefited. It is interesting that, during the “first wave” of thinking about the idea of “geo-economics” in the early 1990s, Japan and the European Union were seen as “geo-economic” powers. Now, in the “second wave”, China has replaced Japan as the leading “geo-economic” power in Asia. Meanwhile, in Europe the focus is on particular EU member states and above all Germany competing with each other in a zero-sum conflict rather than on the EU as a whole.

Europe is a particularly interesting case for “geo-economics” in part because of its post-war rejection of the use of military force to achieve foreign-policy objectives. But if “geo-economics” is the idea that, as Daniel Bell put it, “economics is the continuation of war by other means”, it makes more sense to describe individual member states as “geo-economic” powers than the EU as a whole. After all, although military means have become obsolete within Europe, and despite fears about the “demilitarisation” of Europe, some member states such as France and the UK continue to have significant military capabilities and continue to deploy to achieve their foreign-policy objectives beyond Europe, for example in the form of humanitarian intervention in Libya. Germany, on the other hand, tends to oppose the use of military force even beyond Europe even as it seems to become more assertive within in, so the idea of “geo-economics” is particularly useful in describing its foreign policy.

In economic terms, the weakness of the euro has been good for German exports beyond the eurozone and above all in China. In political terms, the crisis seems at least to have accelerated a shift in the balance of power in Germany’s favour and prompted a debate about Germany “hegemony” in Europe. However, a worsening of the euro crisis along the lines Frankel suggests – a Greek default, perhaps followed by Portugal, with the risk of contagion to rest of eurozone and beyond – would be bad for Germany in economic terms even if it shifted the balance of power within Europe further in Germany’s favour. A complete collapse of the euro would certainly be bad for bad for Germany: it would mean a return to a stronger currency that would make exports less competitive.

The situation for China in relation to the US is similar to that of Germany relative to the eurozone. From a strategic perspective, it might be thought that the US “fiscal self-destruction” Frankel describes could in some ways be advantageous to China because it would accelerate American decline. At the same time, however, it would obviously be bad in economic terms for China. Zbiginiew Brzezinski recently told the story of “an astute Chinese public figure” who sees American decline as inevitable but tells a visiting American that he hopes the United States does not decline too quickly. He understands, as Brzezinski puts it, “that a rapid decline of America’s global primacy would produce a global crisis that could devastate China’s own well-being and damage its long-range prospects.”

These two examples would seem to suggest that shocks would not really be good for anyone because of a complex mixture of economic and political interests. Similarly, it is hard to see winners from an oil shock or a Chinese hard landing – the other two shocks Frankel describes. This raises the question of what “victory” means in a Luttwakian “geo-economic” world in which some states increasingly use economic means rather than military means. Paul Kennedy claims that great powers with greater material resources have always won great power wars. But unlike Kennedy, who seems to claims that the world was always “geo-economic”, Luttwak’s argument is that the world is becoming more geo-economic as military means become less useful. The examples outlined by Frankel suggest that, in a globalised world in which there is a complex mixture of interdependence and competition between states, shocks tend to be bad for everyone. So what is “victory” in this type of world?

In the classical geopolitical world of military means, you could dramatically and suddenly change balance of power by conclusively and decisively winning a battle or war. On the other hand, in a geo-economic world in which some states use economic means to shift balance of power in their favour, you don’t want a decisive victory over your enemy – in fact there are no enemies in an old-fashioned sense – because we’re all too invested in globalisation. Thus although there may at some point be a war between China and the US – in fact, some international relations theorists such as John Mearsheimer argue it is likely – it would not be good for either of them.

Perhaps in a globalised world “victory” is the creation of “asymmetric interdependence” – that is, a relationship with another state in which it is more dependent on you than you are on it. The problem is, this type of “victory” is not one that a “geo-economic” power wants to achieve too quickly. Ideally, as the Chinese official suggested, you want to create asymmetric interdependence gradually. In other words, “geo-economic” powers want shifts but they do not want shocks, even where they accelerate shifts in the distribution of power in their favour. In fact, to a “geo-economic” power, sudden victory may actually look a lot like defeat.

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